For Global Markets, It’s All About Oil

Jeffrey Buchbinder (00:00):

Hello everyone and welcome to LPL Market Signals. Jeff Buchbinder here with my friend and colleague, Kristian Kerr to talk all things global macro. Kristian, thanks for joining me this week. Boy, there's a lot to talk about as there always is these days. Of course oil in focus. So I know you brought six charts, I've called it 'Around the World in Six Charts.' A lot of them are certainly oil and Iran related but not necessarily all of them. So looking forward to hearing your thoughts on where we are. So how are you this week?

Kristian Kerr (00:42):

I'm well, yeah. And macro is basically oil in Iran, so <laugh>, that's how we go around the horn with the macro world right now.

Jeffrey Buchbinder (00:53):

There you go. Yeah, certainly the S&P is related to that and positioning's related to that. Yeah, that's the topic du jour clearly. It is April 6th. Hopefully everybody had a nice holiday weekend. We're recording this middle of the day Monday. And we got a little bit of green. Here's our agenda. Stocks broke the losing streak last week after five straight down weeks. Of course, optimism around a potential off ramp helped us have a pretty strong week for stocks. We'll go around the world, as I mentioned, with Kristian's six charts. Then I'll recap the weekly market commentary for you. It's available on lpl.com. It's a little bit more historical perspective on how markets tend to react to geopolitical conflicts. And then I've worked in an earnings study as well, making the point that when earnings are strong stocks tend to hold up better than you might expect.

Jeffrey Buchbinder (01:55):

And then, of course, as we always do, we'll finish with a preview of the week ahead and we get inflation data this week. So here, first your market recap. We had, of course, a holiday short week, the calendar week, we are up over 3% on the S&P. This is a five day look. So we are looking at a 1.7% increase in the S&P 400. Still strong. We're actually only down three and a half percent year to date. So a little bit more than that conflict to date, but still pretty manageable. Stocks have held up quite well. Kristian, you surprised that we're not down more given what's going on in the world?

Kristian Kerr (02:40):

Yeah, that's what we've talked about, right? I think the drawdown in US equities has been fairly limited, right? Given the geopolitical events that we've experienced here over the last month. You know, I think there are a few reasons for that. But, you know, I think a lot of it, there's a positioning element to this that we're seeing. But I mean, yeah, if you had told me beginning of the year we were going to see the rotation that we, that we saw with respect to, you know, mag seven, you know, losing leadership then throw in, you know, a geopolitical event like this, you would think it would be down further than it was. So from that lens, definitely surprising. But, you know, there's two ways to look at this. It's either resilience or maybe complacency, right? I think that's what the market's really trying to struggle, or what the market's struggling with right now. Is that the question?

Jeffrey Buchbinder (03:37):

Yeah, absolutely. The, you mentioned the mag seven, that was one of the big winners last week, right? So you see that in comm services up 4% for the week. You see that in tech up two and a half percent, again, five day, five trading days, not, not just calendar week. And although consumer discretionary was one of the weaker performers, because it's so oil price sensitive you're still seeing some of the more tech like stuff there hold up. Okay. and of course, not surprisingly, when you know, the market looks through the conflict, which it did last week, you would expect energy to be down. And it was down about three point a half percent. I also think it's interesting to point out some of the international markets that have been holding up. Well, of course you follow the international markets closely, Kristian. So Japan, I know they're starting to get ships through the Strait of Hormuz I guess they're paying a toll of some sort, but they're getting ships through. Japan's a winner. The UK is doing pretty well Brazil as well. Any comments on any of those markets?

Kristian Kerr (04:52):

Yeah, no agree. I, you know, Japan's held up very well, especially given that it's a net importer. But I think it goes back to the crux of the question, you know, is this, is this supply shock going to be? Is it, is it somewhat transitory or is it going to be longer lasting? Because if it, if it is, if it doesn't end up being longer lasting, then I think those markets are vulnerable. But to your point, markets last week were looking through some of the negative elements and focusing more on the positive. In that type of environment, the countries that are arguably most exposed, you'd expect to do well and I think we saw that last week.

Jeffrey Buchbinder (05:30):

Yeah, and you've mentioned Brazil's refined product, but they do have more natural resources, certainly than some of the Asian countries. Yeah. So there are other factors to consider like an election, but that market certainly makes some sense that they would be somewhat insulated. So let's move on and look at bond market. So you see here the Bloomberg Agg bond market benchmark was up 0.8%. Really strong actually. So rates have come down. It's interesting that even though oil was up sharply that stocks were up and, and bond yields were down. So, your thoughts on that, Kristian, is that just does it just take the oil market a little bit longer to adjust and the market, the rest of the markets can be more forward looking.

Kristian Kerr (06:23):

Maybe. I mean, I think there was an element when the, when the conflict started in the Middle East you know, going back to it was a lot of it driven by positioning. And I think there were a lot of bets in the bond market going into that for lower rates. You had a lot of steeper trades that were put on. I think you saw those get unwound, and that kind of caused this dynamic of you know, the market probably getting a little bit more hawkish than it really was. So I think that that's been a big driver of what's going on in the rates market. We've sort of seen that normalized here from a positioning standpoint. So that's my main take there. I mean, I do think last week, you know, it was interesting given that we had payrolls data on the day when markets were effectively closed.

Kristian Kerr (07:11):

You know, interesting print, right? Because obviously on the headline number on the surface was a big beat versus consensus. But then when you kind of looked, looked into some of the data, you know, big negative revision you know, labor participation was the lowest in since 2021. You know, a lot of the jobs you could say were workers who had been on strike. That came back. So a little bit of everything for you if you were looking at those numbers. But I think what it did is it makes things a little bit more complicated for the, for the fed here. And what we saw in the market was kind of this idea of pushing back when the next round of rate cuts is going to be coming.

Kristian Kerr (07:57):

Kind of certainly see it kind of get more back halved. So, you know, it kinda just makes things more complicated for the Fed. But certainly some interesting things. I think over the next few weeks, you know, we've got the inflation data obviously later this week, which I think is going to be really important for the bond market and, and seeing whether what's going on in the Middle East is starting to lead towards more inflationary pressure. So, you know, big week ahead, I think, for rates and bonds.

Jeffrey Buchbinder (08:26):

Yeah. And certainly Powell being a little bit dovish last week in his speech contributed to the bond market gains as well, the Agg now back to break even year to date. So even though you're down a little bit on stocks, you're not down on bonds. So here's the S&P 500 chart. I know you have a different look on this in your six charts, Kristian, but I mean, we're just waiting for this test of the 200 day moving average. We were 60 points away on Friday. Now we're a little bit closer. Yeah. But not, not quite there yet. I dunno if you want to comment on this specifically, or you want to wait until your chart here in a couple slides.

Kristian Kerr (09:05):

Yeah. You know, kind of been saying this for a few weeks now, but yeah, you know, below the 200-day, not a, not a great place to, to be. So, you know, it, it wasn't lost on me that when we did rally or the rallies that we've seen have kind of been failing when, when, when we get there we'll get really close to there. So I think you want to see that level taken out to, to at least start confirming the idea that there's, that there's a a more sustainable low in place. But I, you know, I think watch the 200-day, probably need to get through it here relatively, relatively soon to kind of keep the momentum going on the upside.

Jeffrey Buchbinder (09:43):

And we haven't seen the capitulation of selling that. Certainly you and Adam Turnquist are looking for to suggest that maybe the risk reward is good enough to just go in even without that breakthrough Yeah. Above the 200 day. So, so yeah, we're kind of in no man's land technically. So let's get to your six charts here, Kristian. We'll start domestic I guess with positioning here. So this, this is combined positioning, so it's institutions and retail, right? And it's really not that negative, which might surprise people.

Kristian Kerr (10:19):

Yeah, that was, that was kinda what I was trying to show here is, you know, there's this question in the market, given all the events of the past month. the market's held up really well, and kind of, I was saying, being in the call, there's kind of two lenses you can look at this through. One is the market's acting very resilient you know, not lost on me that earnings estimates have moved up during the last few weeks when this has been going on. So, you know, that's kind of one view, the more optimistic kind of take on things. And the other one is that, you know, as, as this lack of supply starts to be felt, you know, we've had a lot of boats that were kind of still in transit and, you know, they've all reached where they were going now that as kind of slack of supply becomes more real, that, that we need a capitulatory type event before we get a low.

Kristian Kerr (11:12):

And, and really what the positioning data shows is that, you know, relative to similar instances over the past, you know, call it 15 years it's been relatively muted, right? You know, we were at, at somewhat elevated levels at the start of this, you know, coming off that big rally from the, the April tariff stuff last year. So we've seen kind of a, you know, a fairly decent de-risking, but we're only right around neutral right now. And, and really where positioning kind of tends to be useful in terms of giving you a really good risk reward entry point is when you're kind of sub-1.5 standard deviations — a Z score of negative 1.5 or below, right?

Kristian Kerr (11:56):

And we're nowhere near that. So that's kind of been the, the issue if you're, if you look at positioning, you look at technicals like I do, is you kind of want to see us get to levels that are quite a bit lower than we are now. Not saying that we can't bottom from these sub positioning levels, but kind of the really strong signal, those tend to come from a bit further down. So, you know, that's the question. Do we need to see a little bit of a positioning cleanse, do we need to see a little bit more fear in the market first? And that's really what we're trying to figure out here. But again, we were to get back to the 200-day, maybe, maybe this is all you need to see from positioning or a de-risking standpoint. But I think we need to see that first before you can even start making that argument. So right now, a little bit biased to, to that we probably need to see a little bit more of a de-risking episode before we can kind of, you know, make the all clear or saying that the risk/reward is favorable to start kind of getting back into equities more aggressively.

Jeffrey Buchbinder (12:56):

Mm-Hmm. Yeah, definitely have not seen the washout, not even close, really. All right. Next chart. S&P 500. I alluded to this that you had two looks at this, this one goes back to 2019.

Kristian Kerr (13:09):

Yeah.

Jeffrey Buchbinder (13:09):

What's, what's your message here when looking at this longer term uptrend on the S&P?

Kristian Kerr (13:15):

Yeah, kind of just wanted to zoom out a bit and, and, and talk about kind of where we are. You know, I think the low that we had in March of 2020, well below current levels, you can make the case that, that that's really where the, you know, kind of the broader term bull market started. And we're still, you know, we're, we're, we're still well within kind of a, an upward sloping trend, right? And every time we've kind of tested the bottom end of this channel — we've held it. So longer term, still uptrending, still positive. So, you know, typically you want to be looking to get exposure to the uptrend on pullbacks. I think the intermediate term trend has shifted, and that's what we've talked about — going below the 200-day. So that's that red line still sloping higher, so you can make the case that the intermediate term trend is still higher.

Kristian Kerr (14:05):

But the fact that we're below it is clearly a warning sign. We've got the intermediate-term trend potentially shifting, but the long-term trend remains higher. So if you look kind of at where we are you know, like I would say kind of the, the big levels if we were to get further selling or capitulation it would be those old highs from late 2024, the levels that started to decline into the Liberation Day episode last year. But you'd want to see we got down there, us hold that, right? But that's going to be the natural level, I think, to watch. And the reason I want to flag that is you go back to last year during the April tariff stuff, that's precisely where the market bottomed was against those old highs from you know, basically 2021-2022.

Kristian Kerr (15:02):

So that tends to be a pattern that you see. So that's kind of, if we are going to get a, you know, another leg down I think that's the first real test for the market. But I think, you know, overall it's very easy to get caught up in the short term. And, and really just wanted to show that we are, we are still in a, in a very kind of strong, longer term bull market when you zoom out. And kind of the, the way I think to approach that is to look at it this way: when you get drawdowns into those types of advances, where do you start looking for places to kind of reenter, you know, increase exposure. And I think that first test is going to be those old highs from late 2024 to early 2025.

Jeffrey Buchbinder (15:48):

Yeah. And it's kind of,

Kristian Kerr (15:49):

The low six thousands.

Jeffrey Buchbinder (15:51):

Yeah, I was just going to say 6,100-6,150, yeah. Kind of in that range we've highlighted for other technical reasons as a place this might land. You think it might even be a little bit lower than that

Kristian Kerr (16:03):

Could be. You know, I put in that and if you look at the, so, you know, if you think about a slope, it's kind of just the gradient that the market tends to respond to. And if you take some of those prior lows from 2024, clearly that slope has been driving things even outside the outer boundaries of the channel. So that line comes in a little bit lower. So I think somewhere in that zone, kind of the, you know, the low 6,000s, 6,150 down to 6,000, is kind of the level you expect to see the market respond. And if we kind of get there and then you don't hold it, that's telling you something as well. So a lot of it's like how you react when you get there.

Kristian Kerr (16:43):

Now, on the flip side, not saying that we can't, we have to go down there, right? You know, I would argue the positioning chart I showed before, there's still a fairly good chance that that has to happen. But if we were to kind of turn around here, get a multi-day close above the 200-day, a weekly close above there, then maybe that's all we're going to see on this decline. I mean, it was almost 10% from peak, the trough. So maybe that's enough. But, you know, from a purely technical lens, you want to kind of see the market go and test a big support level. You know, the really big support here is going to be that 6,150 to 6,000 area. And if we were to get down there, that's where I think you need to pay extra close attention to how we respond to such big support.

Jeffrey Buchbinder (17:30):

Yeah. We'd probably need another disappointment in the Middle East to get there. But the flip side is you could certainly have an off ramp or a ceasefire become apparent in the next week or two, and then, you know, maybe you go right back to the 200-day and break through it. So yeah, it's a combination of news flow, fundamentals, and technicals altogether. It's clearly a muddled picture. Of course oil is still calling the shots <laugh>. Yeah. As you say here, Kristian, this is the volatility of oil, not the price of oil, correct? You talked about this a number of times, is something to watch, doesn't look like we've really had the breakdown that we want to see here.

Kristian Kerr (18:14):

Yeah. And that's kind of the main point, you know, I think I called it the last time we did this call, you know, the chart of truth mm-hmm <affirmative>. And the idea here is — think of it like the VIX of oil, right? And you know, I think the last time we were getting right up to the, to the highs from 2022 when, when Russia invaded Ukraine and kind of the idea was, you know, we were in this mono-factor market, singular focused market, which is, you know, what's oil doing? And that's going to continue to generally drive market movements, and we've been seeing that. Really, I think you need to see this get below the extremes from 2022 and start to settle below those levels. And right now, you know, we went quite a bit above those levels and we've backed off, but we're still kind of consolidating above those extremes.

Kristian Kerr (19:08):

So I think, you know, you can't really call an all clear until you start seeing kind of the volatility of oil start to pull off quite a bit more than where we are now. And, you know, say we start getting sub 80, sub 70 in this index, and I think that's, and start kind of staying there for a little bit, then that would be kind of the first material sign that we are starting to get an environment change, regimes start to shift, be less about oil, and maybe some other factors start to drive the market. But until we see that you know, I think what's going on in the Middle East can continue to be the primary driver of equity market movements.

Jeffrey Buchbinder (19:45):

So yeah, when you price this, it was 95, the high in 2022 around Russia's invasion of Ukraine was about 80.

Kristian Kerr (19:54):

Yeah.

Jeffrey Buchbinder (19:54):

Even though we've come down, we're still above that 2022 high and you know, have a ways to go to break below that. The stock market vix, I think tells a similar story. We're, we're not quite into that cool down zone, a little bit elevated. Really want to see both the OVX and the stock market VIX yeah. To you know, break below prior highs. So thanks for that, Kristian. Let's keep going on the oil theme. So I was encouraged to see some ships get through the strait, although certainly they are paying tolls, it appears. I saw India ships to India getting through Japan, getting through. Those are biggies. We, we certainly weren't surprised that some China ships got through, but yet the overall count is still pretty low.

Kristian Kerr (20:48):

Yeah, I think it was 21 over the last three days. And then who knows, you know, maybe some, some are running the gauntlet as well, right? And doing it with their trackers turned off. So, but bottom line you know, this number I'm showing here is probably off, but still well below the averages. And really what I wanted to show with this chart is this is what's driving things, right? You know, the markets want to see an end to this traffic starting to pick up you know, with, with Hormuz traffic recovering and right now we're kind of far off normalized levels. Certainly positive that we're starting to see some shifts get through, but, but a lot of that seems kind of token for the, for the time being. But I think what the markets want to see is a resolution one way or another where there are molecules getting out — supply you know, supply going to where it needs to go. And, you know, again, the longer this kind of draws out there starts to be more and more knock on effects. So we're starting to get into kind of crunch time to where we want to start seeing kind of this chart ticking up and getting back towards more normalized levels here.

Jeffrey Buchbinder (21:59):

Yeah, we're at the, you know, roughly the end of the four to six week timeframe that, that Trump gave us when this started. So and certainly everything he said recently suggests that he expects us to come to a close here fairly soon. So it'll be interesting to see what the strait looks like after that off ramp, whatever it looks like. But yeah, clearly we're not near the 80 plus ships a day pace that we were at before February 28th. So we'll keep watching the news like all of you. So all right, next chart is a prediction market. Look at how likely the strait is to be open by June 1, and this, this percentage, at least based on Kalshi, is pretty low.

Kristian Kerr (22:48):

Yeah, and that's what I wanted to highlight a couple things here, but one really is that there is a lot of room for a big portion of the market to get this wrong, right? And that's really what I'm trying to highlight here. And this first chart shows, yeah, you know, it's the prediction markets and they're basically saying there's a one-in-three chance that we're not even going to see normal traffic, but a little bit below average traffic, by the start of June. So, you know, there's a big part of the market, and again, you know how much money is really in these contracts, you know, it's relatively low, but you can make the case that you know, they're useful because if people feel that strong, they're actually putting hard-earned money behind it, which gives the data some usefulness.

Kristian Kerr (23:36):

But you know, basically we've been hanging around the lows. If you look at some of the same prediction markets on when there's going to be a ceasefire you know, basically a one in roughly a little bit less than a one in five chance last I looked by April 15th. So, you know, not a lot of optimism in the, in the prediction markets. And I think, you know, if we do get a resolution, then, you know, there's a lot of people that aren't thinking it can happen in a, in a short term timetable. So that could be a pretty big catalyst for some upside across, you know, equities and, and cross asset, right? So that's just what I wanted to highlight, there doesn't seem to be a lot of optimism in the prediction markets. Let's go to the next chart.

Kristian Kerr (24:22):

This is where there does seem to be quite a bit of optimism. And that's in the longer-dated futures contracts, right? So one thing to know about how kind of oil works or commodities work in general is that, you know, you've got a futures contract, which is delivery on a certain date at a certain location. And you know, Brent crude is more important because they're kind of the ones where oil is most impacted by what's going on in the Strait of Hormuz. But what I found interesting is that, you know, so you look at what's going on in the prediction markets — they're showing, you know, not a very high chance of, of, of, you know, supply coming to the market with the Strait of Hormuz getting opened up yet, you look at, you look at Brent crude futures in December of, of this year, you know, it's only trading around $79 as of last week, right?

Kristian Kerr (25:11):

And that's telling you that they don't think this is going to be a long lasting issue because they would be trading a lot higher, right? Mm-Hmm <affirmative>. So you've got this element of: there's a lot of people in the market that are quite negative, but then the actual commodity itself has not responded the way you would expect if there is going to be you know, a long-term supply issue in, in the crude market. So that's what I want to highlight is that there is, there's a lot of uncertainty. And you look at a lot of these things, it's basically a 50 50, you know, flip of a coin and you've got a lot of different markets saying different things, which tells you no one really knows, right?

Kristian Kerr (25:56):

Because you know, if the Brent Crude December contract is wrong and we start having supply issues, it's going to go a lot higher, right? And, and likewise, if the prediction markets are wrong, then, then this probably goes quite a bit lower from here. But I just wanted to flag this. I thought it was a very interesting chart in the sense that typically, you know, longer-dated contracts and short-dated contracts tend to trade pretty closely with each other, and they're starting to diverge quite a bit. So again, this market is telling you that they're not so certain there's a big, long-lasting supply issue. So a positive in terms of what's, what's going on out there right now?

Jeffrey Buchbinder (26:37):

Yeah. For, for the wonks out there, I think you call this backwardation <laugh>, right? When you have a cheaper long-term contract. So that's a really great point. We get asked, I'm sure many of you are wondering, you know, why is the market holding up well why aren't we seeing higher yields in the bond market in response to this? Yeah. Higher oil and higher inflation and all that. Well, this, this is your answer. It's as simple as that. Market doesn't see this as a long term oil disruption. Great choice of charts there, Kristian. Thanks for bringing that to us. Let's move on to the weekly market commentary and then we'll preview the week ahead. So I did this on historical perspective, not just how do stocks do during geopolitical events but also how do they do when earnings growth is really strong?

Jeffrey Buchbinder (27:29):

So first I narrowed down the events. You know, we had like, I don't know, 25, 26 geopolitical events in our last study. I just narrowed it down to only wars and significant military engagements, which I think is certainly more comparable to what we're experiencing now. And the message is the same. The average drawdown during these events is only 7%. We just got nine, but seven is certainly a pretty manageable drawdown in the S&P 500. And you historically recover those declines within about 50 days. So you see here, the vertical axis is the number of days to recover the S&P 500 decline. Look at how low these dots are, right? I mean, you get a little bit above 50 when you're talking about the breakout of the Korean War, but it's basically Iraq-Kuwait 1990 and Pearl Harbor where it took longer.

Jeffrey Buchbinder (28:27):

So it goes without saying that this isn't Pearl Harbor. And we don't think this is Iraq-Kuwait either, because that was a much bigger disruption to energy markets and it was a, it was a recession anyway, <laugh>, right? We were headed for recession. Regardless, that just sort of was the last straw. The economic environment, the economic foundation is much stronger today. So we think we're going to be kind of one of these low dots when all the dust settles certainly where you want to be. Alright, next chart is just double digit earnings growth years against annual stock market returns. Okay? So thank you to Evercore ISI for this concept, their equity strategy team, Julian Emanuel gave me the idea. So you take double digit return or double digit earnings growth years on the x axis against your total return that year.

Jeffrey Buchbinder (29:25):

On your y axis, your vertical axis. You can see here, we're up, this, this shows 10 out of 12, I believe, but we left 2003 off because the earnings growth was so strong, it would've distorted the scale earnings. We, you see it in the footnote, earnings growth was over 300% that year. So that counts though. Because stocks were up the down years were 2018 and 2000. of course, the market started pricing in the end of the.com boom, the bubble bursting. And then in 2018, the market was worried about a Federal Reserve policy mistake, right? That was kind of round one of the Trump Powell battle, which I guess Trump won that one. But at any rate, we ended up recovering all those losses from that policy scare in late 2018, because 2019, the S&P 500 was up about 30. So we don't think we're bursting a dot-com bubble.

Jeffrey Buchbinder (30:28):

We don't think we're going to have a near-bear market because of fears of a Fed policy mistake. Therefore we would expect stocks to be higher this year and fit with one of these higher dots where you get double digit earnings growth and you get higher stock prices. So bottom line earnings are still relevant even though nobody's really talking about them. And if we do get this double-digit growth — actually, consensus is 17%. Now, we'll talk more about earnings next week probably, but 17% earnings growth is consensus. That certainly is strong support for stocks to go higher. So that's in the weekly market commentary on lpl.com. Alright, back to you, Kristian, for a preview of the week ahead. I think inflation is the most interesting economic data point to watch, but we did just get the ISM services data, which was, was interesting. What should investors be paying attention to this week?

Kristian Kerr (31:27):

Yeah, I think it's going to be the inflation data — starting Thursday with PPI, but I think Friday's going to be the big one. And, and I think, you know, market's going to be looking for even the slightest sign of the of the Iran War, you know, and related energy price spikes they're starting to pass through to the economy or not. So I think that's going to be the big thing to watch this week from an economic standpoint. Obviously, whether, you know, we have this hard deadline in, from, from President Trump in terms of getting a ceasefire or not. So obviously that's going to be probably the, the real driver of everything this week. But yeah, definitely going to be watching the inflation data later in the week.

Jeffrey Buchbinder (32:11):

Yeah, and no doubt the ISM services prices paid index was higher than expected and jumped quite a bit. Seven points month over month. So that's certainly going to contribute to a little bit of inflation anxiety heading into those reports. Of course, importantly, the PCE data, which the Fed thinks matters more, is February data. So that will not include the conflict in Iran, the CPI ON Friday does. So that'll be much more interesting and get a lot more attention. I think the month over, I'm showing year over year here, 2.7% core. I think the month over month headline is probably going to be up close to 1%. That's a big number. Yeah. But again, we're going to look through it. What matters is what happens in the strait and getting oil through and getting to a ceasefire. So agreed. That'll be what everybody's watching most closely, as has been the case since the start of March. All right, I think we'll wrap there. So thanks Kristian for joining. Thank you to all of you for listening to an LPL Market Signals. Hope that was helpful and engaging. We'll talk to you next week. Everybody have a great week. Take care. We'll see you then. See you.